Russia (formally the Russian Federation (Russian: Российская Федерация, Rossiyskaya Federatsiya), is the largest country by area (17,075,200 square kilometers) and has the sixth largest population spanning from Eastern Europe to Northern Asia. Its capital is Moscow.

The history stretches back over a thousand years, with rule by the Czars until communists took over the nation in 1917, and were subsequently overthrown in 1991. Russia was the largest constituent of the Soviet Union. After the dissolution of the Soviet Union, the nation became known as the Russian Federation. Russia had an extensive empire built up over hundreds of years, almost all of which broke away in 1991.

Climate: Huge variation from humid sub-tropical in Krasnodar krai, to desert/semi-desert in the Altai republic, and arctic tundra in north eastern Siberia, which is one of the coldest areas on the planet.

Religion

In practice, only a minority of citizens actively participated in any religion. Many who identified themselves as members of a religious group participated in religious life rarely or not at all. There is no one set of reliable statistics that breaks down the population by denomination, and the statistics below are compiled from government, polling, and religious group sources.[1]

Approximately 100 million citizens are Russian Orthodox. Muslims, with a population estimated between 14 million and 23 million, form the largest religious minority. The majority of Muslims live in the Volga-Ural region and the North Caucasus, although Moscow, St. Petersburg, and parts of Siberia also have sizable Muslim populations. There are an estimated one million Buddhists, the majority of whom live in the traditionally Buddhist regions of Buryatiya, Tuva, and Kalmykiya. According to the NGO Slavic Center for Law and Justice, Protestants make up the second largest group of Christian believers, with 3,500 registered organizations and more than 2 million followers. The Roman Catholic Church estimated that there are 600,000 Catholics, most of whom are not ethnic Russians. There are an estimated 250,000 Jews, the majority of whom live in Moscow and St. Petersburg. In some areas, such as Yakutiya and Chukotka, pantheistic and nature-based religions are practiced independently or alongside other religions.

According to the annual report from the Human Rights Ombudsman, the Ministry of Justice had registered 21,963 religious organizations as of January 1, 2008, 993 fewer than January 2006. The registered religious groups (with the number of registered organizations) include Russian Orthodox (12,586), Muslim (3,815), Protestant (several denominations totaling 3,410), Jehovah's Witnesses (402), Jewish (286), Orthodox Old Believers (283), Roman Catholic (240), Buddhist (200), and other denominations.

Religion in schools

The federal Government does not require religious instruction in schools, but it continues to allow public use of school buildings after hours for the ROC to provide religious instruction on a voluntary basis. Several regions offer a course on Orthodox Christianity in public schools, and five oblasts or regions (Kaluga, Tver, Bryansk, Smolensk, and Voronezh) have a mandatory class on the "Fundamentals of Orthodox Culture." Students may avoid the Belgorod Oblast voluntary course only if their parents provide and pay for an alternative course. The course is offered as an elective in several other regions. In regions where the class is not mandatory, in practice students may be compelled to take it where schools do not provide alternatives.

Some regions offer a class on "History of Religion," a proposal that the Minister of Education had suggested but did not introduce nationally. Although the Ministry of Education rejected continued publication and dissemination of a controversial textbook that detailed Orthodox Christianity's contribution to the country's culture, some schools continued to use the text. The textbook contained descriptions of some religious groups that members of those groups found objectionable. The Congress of Religious Associations in the Tyumen region appealed to the Governor and regional department of education to allow input from other religious groups into the religious culture curriculum, claiming that the course currently contains only the viewpoint of the ROC.

Roma children in Russia.

Demography

Collecting the census.

In a major demographic catastrophe, population indicators in Russia dramatically worsened after 1990: the number of deaths exceeds the number of births, life expectancy is drastically decreasing, the number of suicides has increased, and there are 240 abortions per 100 live births. Every year since 1992 the country has lost 400,000 to 650,000 population and the current total of 142 million is projected to fall to 100 million by 2050.

Russia's population of 141.4 million (2007) is falling. Lower birth rates and higher death rates have reduced Russia's population at a nearly 0.5% annual rate since the early 1990s. Russia is one of few countries with a declining population (although birth rates in many developed countries have dropped below the long-term population replacement). Population decline is particularly drastic in Russia due to higher death rates, especially among working-age males. Cardiovascular disease, cancer, traffic injuries, suicide, alcohol poisoning, and violence are major causes of death. In a June 2006 speech to the Russian National Security Council, President Putin declared that Russia is facing a demographic crisis and called for measures to improve birth and mortality rates and increase population through immigration, primarily the return of Russian-speaking foreigners.

HIV/AIDS

Russia and Ukraine are said to have the highest growth rates of HIV infection in the world. In Russia HIV seems to be transmitted mostly by intravenous drug users sharing needles, although data is very uncertain. Data from the Federal AIDS Center shows that the number of registered cases is doubling every 12 months and is currently at 300,000 persons. When projections are made which allow for people in high-risk groups who have not been tested for the disease, estimates of the actual number of HIV-infected persons are approximately 3 million. The high growth rate of AIDS cases, if unchecked, will have negative economic consequences. Investment will suffer from the diversion of private and government funds to AIDS treatment. The effect on the labor force may be acute since about 80% of infected individuals in Russia are under 30 years of age.[Citation Needed]

Ethnicity

Most of the roughly 141 million Russians derive from the Eastern Slavic family of peoples, whose original homeland was probably present-day Poland. Russian is the official language of Russia and is one of the six official languages of the United Nations. Russian is also the language of such giants of world literature as Pushkin, Tolstoy, Dostoevsky, Chekhov, Pasternak, and Solzhenitsyn.

Education

Russian band in Pushkin.

Russia's educational system has produced nearly 100% literacy. About 3 million students attend Russia's 519 institutions of higher education and 48 universities, but continued reform is critical to producing students with skills to adapt to a market economy. Because great emphasis is placed on science and technology in education, Russian medical, mathematical, scientific, and space and aviation research is still generally of a high order. The number of doctors in relation to the population is high by American standards, although medical care in Russia, even in major cities, is generally far below Western standards. The unraveling of the Soviet state in its last decades and the physical and psychological traumas of transition during the 1990s resulted in a steady decline in the health of the Russian people. Currently Russia faces a demographic crisis as births lag far behind deaths. While its population is aging, skyrocketing deaths of working-age males due to cardiovascular disease is a major cause of Russia's demographic woes. A rapid increase in HIV/AIDS infections and tuberculosis compounds the problem. In 2007, life expectancy at birth was 59 for men and 73 for women. The large annual excess of deaths over births is expected to cut Russia's population by 30% over the next 50 years.[Citation Needed]

Labor force

Russian unemployment, 2009.

The Russian labor force is undergoing tremendous changes. Although well educated and skilled, it is largely mismatched to the rapidly changing needs of the Russian economy. Official unemployment has shrunken in recent years to 6.9%, and labor shortages have started to appear in some high-skilled job markets. Nonetheless, pockets of high unemployment remain and many Russian workers are underemployed. Unemployment is highest among women and young people. Following the 1991 collapse of the Soviet Union and the economic dislocation it engendered, the standard of living fell dramatically. However, real disposable incomes have doubled since 1999, and experts estimate that the middle class ranges from one-fifth to one-third of the population. In 2006, 15.8% of the population lived below the subsistence level, in contrast to 38.1% in 1998.[Citation Needed]

Cities

Saint Petersburg.

Moscow is Russia's capital and largest city (population 8.3 million). Moscow is also increasingly important as an economic and business center; it has become Russia's principal magnet for foreign investment and business presence. Its cultural tradition is rich, and there are many museums devoted to art, literature, music, dance, history, and science, as well as hundreds of churches and dozens of notable cathedrals.

Traffic in Moscow.

The second-largest city in Russia is St. Petersburg (formerly Leningrad), which was established by TsarPeter the Great in 1703 to be the capital of the Russian Empire as part of his Western-looking reforms. The city was called Petrograd during World War I and Leningrad after 1924. In 1991, as the result of a city referendum, it was renamed St. Petersburg. Under the tsars, the city was Russia's cultural, intellectual, commercial, financial, and industrial center. After Lenin moved the capital back to Moscow in 1918, the city's political significance declined, but it remained a cultural, scientific, and military-industrial center. The Hermitage, formerly the Winter Palace of the tsars, is one of the world's great fine arts museums.

Russia has an area of about 17 million square kilometers (6.5 million sq. mi.); in geographic terms, this makes Russia the largest country in the world by more than 2.5 million square miles. But with a population density of about 22 persons per square mile (9 per sq. km.), it is sparsely populated, and most of its residents live in urban areas.

Government and Political Conditions

Duma Parliament building, Moscow.

In the political system established by the 1993 constitution, the president wields considerable executive power. There is no vice president, and the legislative branch is far weaker than the executive. The bicameral legislature consists of the lower house (State Duma) and the upper house (the Federation Council). The president nominates the highest state officials, including the prime minister, who must be approved by the Duma. The president can pass decrees without consent from the Duma. He also is head of the armed forces and of the Security Council.

Duma elections were held most recently on December 7, 2003, and presidential elections on March 14, 2004. The pro-government party, United Russia, won close to half of the seats in the Duma. Combined with its allies, United Russia commands a two-thirds majority. Vladimir Putin was re-elected to a second four-year term with 71% of the vote in March 2004. The Russian constitution does not allow presidents to serve more than two consecutive terms. Following elections for the Duma occured in December 2007, and for President in March 2008. In these election Dmitry Medvedev (member of United Russia) was elected as new president. Since 2012 Vladimir Putin is president again.

Russia is a federation, but the precise distribution of powers between the central government and the regional and local authorities is still evolving. The Russian Federation consists of 89 regional administrative units, including two federal cities, Moscow and St. Petersburg. The constitution explicitly defines the federal government's exclusive powers, but it also describes most key regional issues as the joint responsibility of the federal government and the regional administrative units. In 2000, President Putin grouped the regions into seven federal districts, with presidential appointees established in Moscow and six provincial capitals. In March 2004, the Constitution was amended to permit the merger of some regional administrative units. A law enacted in December 2004 eliminated the direct election of the country's regional leaders. Governors are now nominated by the president and subject to confirmation by regional legislatures.

Judicial System

The Russian judicial system consists of the Constitutional Court, courts of general jurisdiction, military courts, and arbitrage courts (which hear commercial disputes). The Constitutional Court of the Russian Federation is a court of limited subject matter jurisdiction. The 1993 constitution empowers the Constitutional Court to arbitrate disputes between the executive and legislative branches and between Moscow and the regional and local governments. The court also is authorized to rule on violations of constitutional rights, to examine appeals from various bodies, and to participate in impeachment proceedings against the president. The July 1994 Law on the Constitutional Court prohibits the court from examining cases on its own initiative and limits the scope of issues the court can hear. The system of general jurisdiction courts includes the Supreme Court of the Russian Federation, regional level courts, district level courts and justices of the peace.

The Duma passed a Criminal Procedure Code and other judicial reforms during its 2001 session. These reforms help make the Russian judicial system more compatible with its Western counterparts and are seen by most as an accomplishment in human rights. The reforms have reintroduced jury trials in certain criminal cases and created a more adversarial system of criminal trials that protect the rights of defendants more adequately. In 2002, the introduction of the new code led to significant reductions in time spent in detention for new detainees, and the number of suspects placed in pretrial detention declined by 30%. Another significant advance in the new Code is the transfer from the Procuracy to the courts of the authority to issue search and arrest warrants. There are rising concerns, however, that prosecutors have selectively targeted individuals for political reasons, as in the prosecution of Yukos Oil CEO Mikhail Khodorkovskiy.[Citation Needed]

In spite of the general tendency to increase judicial independence (for example, by recent considerable salary raise to judges), many judges still see their role not as of impartial and independent arbiters, but as of government officials protecting state interests. See below for more information on the commercial court/business law.

Human Rights

Some specific areas of human rights violations of the Soviet era continued on into the late 1990's and even have been reported up to 2002.
These involved experimentation on humans and the use of imported foreign forced labor, particularly from North Korea, to work in forestry in gulag type camps of Siberia (for Russian and other newspaper accounts, see Essay: KAL 007 Survivors and Gulags of Russia). Experimentation on humans have been noted by Russian rights activists in connection with certain medical facilities. The Serbsky Institute and Mental Hospital figuring in as a center for mind altering experiments receives startling confirmation from Emilia Cherkover, former Deputy of the Zelenograd Soviet and member of the Russian Federation Human Rights Commission. Cherkover maintains that, along with Vladivostok and Moscow prisons and the mental hospital in Oryal, microwave (psychotronic and electromagnetic application) experiments had been conducted on humans between 1989 and 1990 at the Serbsky Institute in Moscow (see The Stavitski Account).[Citation Needed]

Journalist Yury Vorobyovsky has been investigating the top secret program of "psychotronic" brainwashing techniques developed by the KGB and the Ministry for three years. He notes Emilia Cherkova's claim that there are over a million victims. Her group, Ecology and Living Environment had filed damages against the Federal Security Service (FSB). The newspaper reports, "there is strong evidence that some kind of psychotronic warfare program did exist in the Soviet period, and that the technology may be falling into the wrong hands" (From Moscow Times, 7-11-95).[Citation Needed]

Chechnya

Government palace building in Grozny, Chechnya.

Chechnya has seen continuing violations of international human rights and humanitarian law committed by Russian and pro-Moscow Chechen forces. Chechen rebels also have committed abuses as well as acts of terrorism. In Chechnya, Ingushetiya, and Dagestan, security forces were involved in unlawful killings and politically motivated kidnappings. Chechen President Kadyrov continued his repressive control as federal forces withdrew. Federal and local security forces in Chechnya targeted families of suspected insurgents with impunity, and Kadyrov's private militia allegedly engaged in kidnapping and torture.[3]

Religion - Human rights

The Russian constitution provides for freedom of religion and the equality of all religions before the law, as well as the separation of church and state. Although Jews and Muslims continue to encounter prejudice and societal discrimination, they have not been inhibited by the government in the free practice of their religion. High-ranking federal officials have condemned anti-Semitic hate crimes, but law enforcement bodies have not always effectively prosecuted those responsible. The influx of foreign missionaries has led to pressure by groups in Russia, specifically nationalists and the Russian Orthodox Church, to limit the activities of these "nontraditional" religious groups. In response, the Duma passed a restrictive and potentially discriminatory law on religion in October 1997. The law is complex, with many ambiguous and contradictory provisions. The law's most controversial provisions distinguish between religious "groups" and "organizations" and introduce a 15-year rule, which allows groups that have been in existence for 15 years or longer to obtain accredited status. Senior Russian officials have pledged to implement the 1997 law on religion in a manner that is not in conflict with Russia's international human rights obligations. Some local officials, however, have used the law as a pretext to restrict religious liberty.[Citation Needed]

Media

Pressure from Putin's regime weakened freedom of expression and media independence, particularly of the major television networks. Five journalists were assassinated in 2008. As some print and Internet media reflected a widening range of views, the government restricted media freedom through direct ownership of media outlets, pressuring the owners of major media outlets to abstain from critical coverage, and harassing and intimidating journalists into practicing self-censorship. Local governments limited freedom of assembly, and police sometimes used violence to prevent groups from engaging in peaceful protest. The government limited freedom of association. The government restricted religious groups in some regions, and there were incidents of societal discrimination, harassment, and violence against religious minorities, including anti-Semitism.[Citation Needed]

Government pressure continued to weaken freedom of expression and the independence and freedom of some media, particularly major national television networks and regional electronic media outlets. A government decision resulted in the elimination of the last major non-state television network in 2003. National press is also increasingly in government hands or owned by government officials, narrowing the scope of opinion available. Self-censorship is a growing press problem. Unsolved murders of journalists, including the killing of respected investigative reporter Anna Politkovskaya in October 2006, have caused significant international concern and increased pressure on journalists to avoid subjects considered sensitive. In August 2007, authorities arrested several suspects in connection with the Politkovksaya case.[Citation Needed]

Civil Society

Enactment of a new law on foreign non-governmental organizations (NGOs) in 2006 was criticized in many quarters as a device to control civil society, that is, private organizations. Implementing regulations appear to impose onerous paperwork reporting burdens on NGOs that could be used to limit or even suppress some of them. This law was used to shut down an NGO for the first time in January 2007 on the basis of extremism charges; however, most foreign NGOs have successfully re-registered. Domestic NGOs were not required to re-register, but are required to meeting new reporting requirements.[Citation Needed]

Government Spending/Taxation

The Russian federal budget has run growing surpluses since 2001, as the government has taxed and saved much of the rapidly increasing oil revenues. According to preliminary figures, the 2006 budget surplus was 7.4% of GDP on a cash basis. Although there are strong pressures to relax spending ahead of elections, the government has loosened its spending gradually, as the economy is running at near capacity and there are dangers of increasing inflation and rapid exchange rate appreciation. Spending increases to date have mostly been for increased salaries of government employees and pensions, but some money is also being dedicated to special investment funds and tax breaks to develop new industries in special economic zones. The government overhauled its tax system for both corporations and individuals in 2000-01, introducing a 13% flat tax for individuals and a unified tax for corporations, which improved overall collection. Business has put pressure on the government to reduce value added taxes (VAT) on oil and gas, but the government has postponed this discussion. Tax enforcement of disputes, particularly following the Yukos case, continues to be uneven and unpredictable.

A major focus of increased government spending has been the military, with large increases being spent on overhauling and updating equipment, as well as increasing salaries of military personnel, though a huge backlog of problems remain from the chaotic Yeltsin era and almost two decades of chronic underinvestment.

Much needed investment in national infrastructure, including railways and waterways, which are much more important in transportation in Russia than in the US and Europe has been insignificant, leading to bottlenecks that hamper growth and development. Telecoms and electricity production and distribution also remain run-down and outdated from the post-Soviet collapse. As a result of this, Russia remains dependent on energy exports for income, with the domestic economy effectively held back by capacity restraints or neglected facilities, a fact which has left Russia vulnerable to a collapse in fuel prices, such as that experienced at the beginning the global financial crisis, when crude oil prices dropped from over $100 per barrel to less than $60. Currently, Russian development of railways and highways in terms of new/renewed miles of route lies at around 1/10 that of China, despite having a much larger landmass.

Foreign Relations

In the years after the dissolution of the Soviet Union, Russia took important steps to become a full partner in the world's principal political groupings. On December 27, 1991, Russia assumed the permanent UN Security Council seat formerly held by the Soviet Union. Russia also is a member of the Organization for Security and Cooperation in Europe (OSCE) and the Euro-Atlantic Partnership Council (EAPC). Russia and the European Union (EU) signed a Partnership and Cooperation Agreement. It signed the North Atlantic Treaty Organization (NATO) Partnership for Peace initiative in 1994. The NATO-Russia Founding Act in 1997 and the NATO-Russia Council superseded that in 2002. Russia acquiesced (despite misgivings) in enlargement of NATO by members first of the former Warsaw Pact and most recently by the Baltic states that had been forcibly integrated into the Soviet Union.

Over the past several years Russia has increased its international profile, played an increasing role in regional issues, and been more assertive in dealing with its neighbors. The rise in energy prices has given it leverage over countries which are dependent on Russian sources. Russia continues to support separatist regimes in Georgia and Moldova.

Relations with the United States

Anna Chapman.

The United States and Russia share common interests on a broad range of issues, including counterterrorism and the drastic reduction of our strategic arsenals. Russia shares our basic goal of stemming the proliferation of weapons of mass destruction and the means to deliver them. We are working with Russia to compel Iran to bring its nuclear programs into compliance with International Atomic Energy Agency (IAEA) rules and United Nations Security Council Resolution 1737. On North Korea, Russia is a participant in the Six-Party Talks aimed at the complete, verifiable, and irreversible dismantling of North Korea's nuclear program. Russia also takes part in the Middle East Peace Process "Quartet" (along with the UN and the EU). Russia now interacts with NATO members as an equal through the NATO-Russia Council but without veto power over NATO decisions. During the past several years, Russia has intensified its efforts to combat trafficking in persons.

Defense

Russia's efforts to transform its Soviet-legacy military into a smaller, lighter and more mobile force continue to be hampered by an ossified military leadership, discipline problems and human rights violations, limited funding and demographics. Recent steps by the Government of Russia suggest a desire to reform. There has been an increased emphasis on practical training, and the government is introducing bills to improve the organization of the military.

Despite large increases in the budget, defense spending is still unable to sustain Russia's large military. Current troop strength, estimated at 1.1 million, is large in comparison to Russia's GDP and military budget, which continues to make the process of transformation to a professional army difficult. This is both the result of the Soviet legacy and military thinking, and Russian geography, which demands a sizable force simply to patrol and maintain normal defensive readiness across Russia's huge, remote and sparsely populated territory. Furthermore, unrest in Russia's souther regions demands a substantial military force at a high level of readiness.

Russian military salaries are low. Though, the army provides all necessities, the quality of accommodation is low, though the situation has improved considerably since the Yeltsin era when the military establishment almost totally collapsed, and some soldiers actually starved when provisions to remote bases went undelivered for months on end. Problems with both discipline and brutal hazing remain common, however. HIV infection rates in the Russian army are estimated to be between two to five times higher than in the general population, and tuberculosis is a persistent problem both in and outside the military, affecting the fitness of recruits.

Bomber jet Su-24.

Although the available manpower (males 15-49) for the Russian Armed Forces was projected at 35.2 million in 2005, only approximately 11% of eligible males do military service. Moreover, military officials complain that new recruit cohorts are plagued by increasing incidences of poor education, communicable diseases and criminality.

The Russian Government has stated a desire to convert to a professional army, but implementation has been delayed repeatedly. Current plans envision a transition to a mixed force, in which professional soldiers fill the ranks of select units and conscription is gradually phased out. Some officials have talked of developing a non-commissioned officer corps to lead the professional army, but the military has yet to make any concrete decisions, due to internal political considerations and a backlog of other issues soaking up increased funding.

Russia continues to maintain a sizable strategic nuclear force equipped with global reach, with land, sea and air based nuclear launch facilities, though maintenance issues continue to affect the readiness of the system due to a flight of skilled personnel from the military, and financial and organization pressures in the post-Soviet era. For this reason, Russia has sought a renewed START treaty with the United States for a mutual reduction of strategic nuclear forces. This agreement was reached between Presidents Obama and Medvedev in April 2010.

Economy

Historic Center of St. Petersburg.

At the end of March, 2009, the World Bank issued a grim forecast of the Russian Economy, projecting a 4.5% decline in the economy in 2009 and warning that 5.8 million Russians would fall into poverty unless the government shifts spending to poor families. It praised the government’s $85 billion anticrisis program, which stabilized Russia’s banks and prevented financial panic. But it said too little had gone to households — a hazard in a society where 37 million people, a quarter of the population, lives near the poverty line.[5]

The Russian economy underwent tremendous stress in the 1990s as it moved from a centrally planned economy to a free market system. Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998. Lower prices for Russia's major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems. The result was a rapid and steep decline (60%) in the value of the ruble, flight of foreign investment, delayed payments on sovereign and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation.

Still, Russia weathered the crisis well. In the 8 years following the financial crisis, GDP growth averaged just under 7% due to a devalued ruble, implementation of key economic reforms (tax, banking, labor and land codes), tight fiscal policy, and favorable commodities prices. Household consumption and fixed capital investments have both grown by about 10 percent per year since 1999 and have replaced net exports as the main drivers of demand growth. Inflation and exchange rates have stabilized due to a prudent fiscal policy (Russia has run a budget surplus since 2003). The government created a stabilization/rainy day fund ($127 billion in mid-2007), and has the third-largest foreign exchange reserves in the world (close to $420 billion in mid-2007) which should shelter it from commodity price shocks.

Russia's balance of payments moves from strength to strength. The current account balance grew from $58.6 billion in 2004 to $95.3 billion in 2006, almost entirely due to oil price increases. The capital account turned positive in 2006, with net inflow of $6.1 billion. In addition, net private capital flows in 2006 increased significantly to $40.9 billion, compared to an inflow of $0.1 billion in 2005 due to liberalization of the capital account in mid-2006. Foreign direct investment (FDI) flows dramatically improved in 2006 to an estimated $31 billion (inflows totaled $15.4 billion and $14.6 billion in 2004 and 2005, respectively). As of July 1, 2006, the ruble is convertible for both current and capital transactions. Russia prepaid its entire Soviet-era Paris Club debt of $22 billion in late 2006, pushing Russia's sovereign foreign debt down to $45 billion at the end of 2006, or about 5 percent of GDP. Russia's total public and private foreign debt at the end of 2006 was $310 billion, or 31 percent of GDP. Such a dramatic reversal to the macroeconomic situation is truly remarkable. Russia currently has a sovereign investment-grade rating from Standard and Poor's of BBB+.

Street in Znamensk.

Although the economy has begun to diversify, the government budget remains dependent on oil and gas revenues; consumption and investment are, however, contributing to an increasing share to GDP growth. While currently sheltered from external price shocks, the government realizes the need to intensify reforms that will promote new investment in aging infrastructure and continued productivity gains. The government believes it can do this by creating state-sponsored investment funds, special economic zones, and by exercising control of strategic enterprises (a draft law defining strategic sectors was submitted to the Duma in August 2007). Although investors are returning to Russia, excessive bureaucracy, corruption, insufficient and insufficiently enforced legislation, selective interpretation of laws (particularly tax laws), unclear limits and conditions on foreign investment, obsolete infrastructure, and stalled economic reforms still remain a problem.[Citation Needed] In 2005, the government announced reform programs in four priority areas (health, education, housing, and agriculture), but further work is needed on them as well as in financial regulation, civil service reform, and reform of government monopolies, such as railroads, gas, and electricity.

Gross Domestic Product

City garden, Kolpino.

A strong expansion in domestic demand continues to drive GDP growth, despite a slowdown in manufacturing. GDP growth and industrial production for 2006 were 6.7% and 4.8%, respectively, relative to 6.4% and 5.7% in 2005. GDP growth is currently derived from non-tradable sectors, but investment remains concentrated in tradables (oil and gas). Construction was the fastest growing sector of the economy, expanding by 14% in 2006. The main private sector services--wholesale & retail trade, banking & insurance, and transportation & communications--showed strong growth of about 10%. In contrast, public sector services--education, health care, and public administration--lagged behind with only 2-4% growth in 2006. Recent productivity growth has still been strong in some parts of domestic manufacturing. Real disposable incomes grew by 10.2% in 2006, spurring considerable growth in private consumption.

Monetary Policy

Large balance of payments surpluses have complicated monetary policy for Russia. The Central Bank has followed a policy of managed appreciation to ease the impact on domestic producers and has sterilized capital inflows with its large budget surpluses. However, the Central Bank also has been buying back dollars, pumping additional ruble liquidity into the system. Given the rising demand for money, this has softened the inflationary impact, but these policy choices have complicated the government's efforts to lower inflation to the single digits. Consumer Price Index (CPI) inflation was 9% in 2006 and 10.9% in 2005, having steadily decreased from 20.2% in 2000, due primarily to prudent fiscal policy and in 2006 lower world oil prices.

Commercial Law

Russia has a body of conflicting, overlapping and rapidly changing laws, decrees and regulations, which has resulted in an ad hoc and unpredictable approach to doing business. In this environment, negotiations and contracts from commercial transactions are complex and protracted. Uneven implementation of laws creates further complications. Regional and local courts are often subject to political pressure, and corruption is widespread.[Citation Needed] However, more and more small and medium businesses in recent years have reported fewer difficulties in this regard, especially in the Moscow region. In addition, Russian businesses are increasingly turning to the courts to resolve disputes. Russia's WTO accession process is also helping to bring the country's legal and regulatory regime in line with internationally accepted practices.

Natural Resources

The mineral-packed Ural Mountains and the vast oil, gas, coal, and timber reserves of Siberia and the Russian Far East make Russia rich in natural resources. However, most such resources are located in remote and climatically unfavorable areas that are difficult to develop and far from Russian ports. Nevertheless, Russia is a leading producer and exporter of minerals, gold, and all major fuels. Natural resources, especially energy, dominate Russian exports. Ninety percent of Russian exports to the United States are minerals or other raw materials.

Industry

Russia is one of the most industrialized of the former Soviet republics. However, years of very low investment have left much of Russian industry antiquated and highly inefficient. Besides its resource-based industries, it has developed large manufacturing capacities, notably in metals, food products, and transport equipment. Russia is now the world's third-largest exporter of steel and primary aluminum. Russia inherited most of the defense industrial base of the Soviet Union, so armaments remain an important export category for Russia. Efforts have been made with varying success over the past few years to convert defense industries to civilian use, and the Russian Government is engaged in an ongoing process to privatize the remaining 9,222 state-owned enterprises, 33% of which are in the industrial manufacturing sector.

Agriculture

For its great size, Russia has relatively little area suited for agriculture because of its arid climate and inconsistent rainfall. Northern areas concentrate mainly on livestock, and the southern parts and western Siberia produce grain. Restructuring of former state farms has been an extremely slow process. Foreigners are not allowed to own farmland in Russia although long-term leases are permitted. Private farms and garden plots of individuals account for over one-half of all agricultural production.

Investment/Banking

Russian Federation Central Bank.

Russia attracted an estimated $31 billion in FDI in 2006 (3.2% of GDP), up from $13 billion in foreign direct investment (FDI) in 2005.Russia's annual FDI figures are now in line with those of China, India, and Brazil. However, Russia's per capita cumulative FDI still lags far behind such countries as Hungary, Poland, and the Czech Republic. The paradox is that Russia's challenging business climate, lack of transparency, and weak rule of law/corruption[Citation Needed] has taken a back seat to Russia's extraordinary macroeconomic fundamentals and the consumer and retail boom, which is providing double digit returns to investors and attracting new flows. Russian domestic investment is also returning home, as the foreign investment coming into Russia from havens like Cyprus and Gibraltar, is actually returning Russian capital . As of the end of 2006, loans to the financial sector were 57.2% of total banking sector assets. Retail loans amounted to $78.4 billion at the end of 2006, up from $41 billion at the end of 2005. Retail deposits increased to $144.1 billion from $95.7 billion over the same period. Also, currently deposits are fully insured up to $4,000 and an additional $12,000 is insured at 90%.

Although still small by international standards, the Russian banking sector is growing fast and is becoming a larger source of investment funds. To meet a growing demand for loans, which they were unable to cover with domestic deposits, Russian banks borrowed heavily abroad in 2006, accounting for two-thirds of the private-sector capital inflows in that year. Ruble lending has increased since the October 1998 financial crisis, and in 2006 loans were 63% of total bank assets, with consumer loans posting the fastest growth at 74% that same year. Fewer Russians prefer to keep their money outside the banking sector, the recent appreciation of the ruble against the dollar has persuaded many Russians to keep their money in rubles or other currencies such as the euro, and retail deposits grew by 65% in 2006. Despite recent growth, the poorly developed banking system, along with contradictory regulations across banking, bond, and equity markets, still makes it difficult for entrepreneurs to raise capital as well as to permit capital transfer from a capital-rich sector such as energy to capital-poor sectors such as agriculture and manufacturing and to diversify risk. Banks still perceive small and medium commercial lending as risky, and some banks are inexperienced with assessing credit risk, though the situation is improving. In 2003, Russia enacted a deposit insurance law to protect deposits up to 100,000 rubles (about $3,700) per depositor, and a bill is currently in the Duma, which if passed will increase this coverage to 190,000 rubles (about $7,000) per depositor.

Trade

Moscow International Business Centre, 2008.

The U.S. exported $4.7 billion in goods to Russia in 2006, a 21% increase from the previous year. Corresponding U.S. imports from Russia were $19.8 billion, up 29%. Russia is currently the 33rd-largest export market for U.S. goods. Russian exports to the U.S. were fuel oil, inorganic chemicals, aluminum, and precious stones. U.S. exports to Russia were machinery, meat (mostly poultry), electrical equipment, and high-tech products.

Russia's overall trade surplus in 2006 was $139 billion, up from $118 billion in 2005. World prices continue to have a major effect on export performance, since commodities--particularly oil, natural gas, metals, and timber--comprise 80% of Russian exports. Russian GDP growth and the surplus/deficit in the Russian Federation state budget are closely linked to world oil prices.

Russia is in the process of negotiating terms of accession to the World Trade Organization (WTO). The U.S. and Russia concluded a bilateral WTO accession agreement in late 2006, and negotiations continue in 2007 on meeting WTO requirements for accession. Russia reports that it has yet to conclude bilateral agreements with Saudi Arabia and Georgia.

According to the 2005 U.S. Trade Representative's National Trade Estimate, Russia continues to maintain a number of barriers with respect to imports, including tariffs and tariff-rate quotas; discriminatory and prohibitive charges and fees; and discriminatory licensing, registration, and certification regimes. Discussions continue within the context of Russia's WTO accession to eliminate these measures or modify them to be consistent with internationally accepted trade policy practices. Non-tariff barriers are frequently used to restrict foreign access to the market and are also a significant topic in Russia's WTO negotiations. In addition, large losses to U.S. audiovisual and other companies in Russia owing to poor enforcement of intellectual property rights in Russia is an ongoing irritant in U.S.-Russia trade relations. Russia continues to work to bring its technical regulations, including those related to product and food safety, into conformity with international standards.